Educational Articles

In this screen, we look at stocks with some degree of risk as well as ample projected 3- to 5-year price appreciation potential. Although most investors would prefer to have low risk and high potential returns, the number of equities that can realistically meet both these criteria are rather limited. Therefore, we have chosen not to include a low-risk requirement in order to attain a broader field of equities to choose from.

We started off by screening for issues with Safety ranks of 4 and above, as well as Price Stability Scores that were in the 50th percentile or greater. The minimum Financial Strength Rating for this screen was a B. In order to incorporate a value element, we excluded those stocks that have beaten the return of the S&P 500 index thus far in 2013, which is now at approximately 11%. Finally, the stocks were required to have a projected 3- to 5-year price change percentage of at least 90%. The resulting list of 51 stocks can be seen below. Out of the list, we have chosen to highlight PTC Inc. (PMTC), a maker of product development software with a score of 55 for Stock Price Stability and price appreciation potential of 98%.

PTC Inc.

Formerly named Parametric Technology Corporation, PTC’s software improves how products and services are created. The core Computer-Aided Design segment is used for product manufacturing. It is the most mature unit and is expected to grow in-line with peers over the long term. The company's other units offer greater potential for revenue and market share growth, in our view. The Product Lifecycle Management division manages physical product data and facilitates product development & design collaboration. The Application Lifecycle Management segment serves the same functions only for software makers. Supply Chain Management helps companies design and optimize all facets of their supply chains. Finally, the Service Lifecycle Management business helps customers plan for or design service functions. The industrial market is PTC’s largest customer group, followed by federal aerospace, defense, electronics, automotive, retail, etc. Historically, the geographical revenue breakdown has been as follows: Americas, 40%; Europe, 40%; Asia Pacific, 20%. The company boasts a diversified customer base of approximately 27,000, the top 100 of which are responsible for around half of revenues.

PTC’s recent results are telling of what is likely to come for the remainder of fiscal 2013 (ends September 30, 2013). While revenue was up 4% year over year, non-GAAP earnings-per-share grew an impressive 55%, owing largely to cost cutting activity. The company was hoping to see improvement in selling conditions in the back half of the year, but it has tempered its top-line outlook to about 4% growth due to recent reports of unfavorable manufacturing data. Indeed, European and Japanese manufacturing remains weak while the U.S. recovery has faltered. Together, those regions represent around 85% of PTC’s revenues. In general, the company does not believe its customers are cutting their IT budgets; rather they appear to be taking a wait-and-see approach regarding the depletion of allocated funds. This leaves the door open for a “budget flush” toward the end of calendar 2013, assuming industry outlooks or GDP growth assumptions brighten.

Despite the weaker revenue outlook, the company is maintaining its earnings-per-share guidance, due to confidence in its ability to improve profitability. Over the past four years it has managed to increase its operating margin by 200 basis points on average, and management expects similar results this year and the following two. PTC cites continued discipline around pricing and discounting, staff cuts, lower back office spending, improved productivity and efficiency of the sales and marketing team, and a favorable revenue mix shift for its recent margin success. It’s not particularly surprising that the company excels at removing costs, considering the purpose of its products is to make businesses run more efficiently.

Once macro conditions do improve, the company should be able to take advantage of the smaller cost base. Indeed, we find PTC well positioned to profit from greater demand. The SLM division ought to prove particularly strong considering the desire of many customers to enhance and develop the lucrative servicing aspects of their businesses. Even the product side seems to be trending toward a service mentality. Many customers appear to share PTC’s vision of developing equipment to be deployed on a pay-per-use basis, as well as implementing “smart” features and beefing up after-sales revenue opportunities, i.e. innovative ways to create revenue streams for physical products instead of simply selling them for cash up front.

Although the top line may come under pressure over the near term, the company should be able to more than offset this through spending cuts, leading to ample earnings-per-share growth regardless of the prevailing macro environment. We have confidence in the company’s ability to grow revenues over the long term. Patient investors may find the shares worthy of consideration.